Credit Suisse Agrees to Pay $5.28 Billion

Credit Suisse Agrees to Pay $5.28 Billion in Connection with Its Sale of Residential Mortgage-Backed Securities

DENVER – The Justice Department announced today a $5.28 billion
settlement with Credit Suisse related to Credit Suisse’s conduct in the
packaging, securitization, issuance, marketing and sale of residential
mortgage-backed securities (RMBS) between 2005 and 2007. The resolution
announced today requires Credit Suisse to pay $2.48 billion as a civil
penalty under the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA). It also requires the bank to provide $2.8
billion in other relief, including relief to underwater homeowners,
distressed borrowers and affected communities, in the form of loan
forgiveness and financing for affordable housing. Investors, including
federally-insured financial institutions, suffered billions of dollars
in losses from investing in RMBS issued and underwritten by Credit
Suisse between 2005 and 2007.

“Today’s settlement underscores that the Department of Justice will
hold accountable the institutions responsible for the financial crisis
of 2008,” said Attorney General Loretta E. Lynch. “Credit Suisse made
false and irresponsible representations about residential
mortgage-backed securities, which resulted in the loss of billions of
dollars of wealth and took a painful toll on the lives of ordinary
Americans. Under the terms of this settlement, Credit Suisse will pay
$2.48 billion as a fine for its conduct. And Credit Suisse has pledged
$2.8 billion in relief to struggling homeowners, borrowers, and
communities affected by the bank’s lending practices. These sums
reflect the huge breach of public trust committed by financial
institutions like Credit Suisse.”

“Credit Suisse claimed its mortgage backed securities were sound, but
in the settlement announced today the bank concedes that it knew it was
peddling investments containing loans that were likely to fail,” said
Principal Deputy Associate Attorney General Bill Baer. “That behavior
is unacceptable. Today’s $5.3 billion resolution is another step
towards holding financial institutions accountable for misleading
investors and the American public.”

“Resolutions like the one announced today confirm that the financial
institutions that engaged in conduct that jeopardized the nation’s
fiscal security will be held accountable,” said Principal Deputy
Assistant Attorney General Benjamin C. Mizer, head of the Justice
Department’s Civil Division. “This is another step in the Department’s
continuing effort to redress behavior that contributed to the Great
Recession.”

“Credit Suisse’s mortgage misconduct hurt people, including in
Colorado,” said Acting United States Attorney for the District of
Colorado Bob Troyer. “Unscrupulous lenders knew they could get away
with shoddy underwriting when making mortgage loans, because they knew
Credit Suisse would buy those defective mortgage loans and put them
into securities. When those mortgages went into foreclosure, many
people got hurt: families lost their homes, communities were blighted
by empty houses, and investors who had put their trust in Credit
Suisse’s supposedly safe securities suffered huge losses. Our office
led this investigation into Credit Suisse to protect homeowners,
communities, and investors across the country, including here in
Colorado. Credit Suisse is paying a hefty penalty and acknowledging its
misconduct, but that is not all. Years after the Great Recession, many
families still struggle to afford a home, so we also crafted an
agreement to bring needed housing relief to such families, including
specifically in Colorado.”

This settlement includes a statement of facts to which Credit Suisse
has agreed. That statement of facts describes how Credit Suisse made
false and misleading representations to prospective investors about the
characteristics of the mortgage loans it securitized. (The quotes in
the following paragraphs are from that agreed-upon statement of facts,
unless otherwise noted.):

Credit Suisse told investors in offering documents that the
mortgage loans it securitized into RMBS “were originated generally
in accordance with applicable underwriting guidelines,” except
where “sufficient compensating factors were demonstrated by a
prospective borrower.” It also told investors that the loans “had
been originated in compliance with all federal, state, and local
laws and regulations, including all predatory and abusive lending
laws.”

Credit Suisse has now acknowledged that “Credit Suisse repeatedly
received information indicating that many of the loans reviewed did
not conform to the representations that would be made by Credit
Suisse to investors about the loans to be securitized.” It has
acknowledged that in many cases, it purchased and securitized loans
into its RMBS that “did not comply with applicable underwriting
guidelines and lacked sufficient factors” and/or “w[ere] not
originated in compliance with applicable laws and regulations.”
Credit Suisse employees even referred to some loans they
securitized as “bad loans,” “‘complete crap’ and ‘[u]tter complete
garbage.’”

Credit Suisse acquired some of the mortgage loans it securitized by
buying, from other loan originators, “Bulk” packages containing
numerous loans. For example, in December 2006, Credit Suisse
purchased a “Bulk” pool of approximately 10,000 loans originated by
Countrywide Home Loans. Credit Suisse selected fewer than 10
percent of these loans for due diligence review. “Reports from
Credit Suisse’s due diligence vendors showed that approximately 85
percent of the loans in this sample violated Countrywide’s
underwriting guidelines and/or applicable law,” but “Credit Suisse
securitized over half of the loans into various RMBS it then sold
to investors.” Credit Suisse did not review the remaining unsampled
90 percent of the pool to determine whether those loans had similar
problems. Instead, it “securitized an additional $1.5 billion worth
of unsampled—and therefore unreviewed—loans from this pool into
various RMBS it then sold to investors.” A Credit Suisse manager
wrote to another manager who was reviewing these loans, “Thanks for
working thru this mess. If it helps, it looks like we will make a
killing on this trade.”

Credit Suisse acquired other mortgage loans for securitization
through its “Conduit” channel. Through this channel, Credit Suisse
bought loans from other lenders one-by-one or in small packages,
and also itself extended loans to borrowers as “Wholesale” loans.
Approximately 25-35 percent of the loans Credit Suisse acquired
from 2005 to 2007 were acquired through its mortgage “Conduit.”

Credit Suisse employees discussed in internal emails that for
Conduit loans, the loan review and approval process was “‘virtually
unmonitored.’” For loans Credit Suisse purchased through its
Conduit, Credit Suisse told investors, ratings agencies and others,
“‘Credit Suisse senior underwriters make final loan decisions, not
contracted due diligence firms.’” Credit Suisse has now
acknowledged, “For Conduit loans, these representations were false.”

Credit Suisse has acknowledged that “[a] September 2004 audit by
Credit Suisse’s audit department gave the Conduit a C rating on an
A-D scale (the second worst possible rating) and a level 4
materiality score on a 1-4 scale (the highest possible score),” and
that a March 2006 evaluation by Credit Suisse of one of the
third-party vendors it used to review Conduit loans “similarly
reported that ‘There are serious concerns as to compliance[.]’”

Between 2005 and 2007, Credit Suisse managers made comments in
emails about the quality of Conduit loans and its process for
reviewing those loans. For example, a top Credit Suisse manager
wrote to senior traders, “‘Of course we would like higher quality
loans. That’s never been the identity of our [mortgage] conduit,
and we’re becoming less and less competitive in that space.’” A
senior Credit Suisse trader, discussing the “fulfillment centers”
Credit Suisse used to review Conduit loans, stated in an email: ‘we
make these underwriting exceptions and then we have liability down
the road when the loans go bad and people point out that we
violated our own guidelines. . . . The fulfillment process is a
joke.’”

For example, in one instance Credit Suisse approved, through its
Conduit, a purchase of over $700 million worth of loans originated
by Resource Bank. Credit Suisse senior traders “referr[ed] to
Resource Bank loans as ‘complete crap’ and ‘[u]tter complete
garbage.’” Despite this, “Credit Suisse provided Resource Bank with
financial ‘incentives’ in exchange for loan volume [and]
securitized Resource Bank loans into various RMBS it then sold to
investors.”

Credit Suisse has acknowledged that it also “received reports from
vendors that it might have been acquiring and securitizing loans
with inflated appraisals” and that its approach for reviewing the
property values associated with the mortgage loans “could lead to
the acceptance of inflated appraisals.” In August 2006, a Credit
Suisse manager wrote to two senior traders, “How would investors
react if we say that 20 percent of the pool have values off by 15
percent? If we are comfortable buying these loans, we should be
comfortable telling investors.”

Credit Suisse used vendors to conduct quality control on a small
subset of loans it acquired. Credit Suisse has now acknowledged
that its quality control review vendors reported that “more than 25
percent of the loans that they reviewed for quality control were
designated ‘ineligible’ because of credit, compliance, and/or
property defects.”

Credit Suisse has now acknowledged that its “Co-Head of Transaction
Management expressed concern that the quality control results could
serve as a written record of defects, and sought to avoid
documented confirmation of these defects.” In May 2007, a top
Credit Suisse manager met with others “to discuss implementing this
reduction of quality control review.” Credit Suisse’s Co-Head of
Transaction Management wrote that “this change was to ‘avoid the
previous approach by which a lot of loans were QC’d . . . creating
a record of possible rep/​warrant breaches in deals . . . .’”

In another example, in May 2007, a Credit Suisse employee
identified two wholesale loans Credit Suisse itself had originated
and wrote, “‘I would think that we would want to see loans like
these that seem to represent confirmed problems, especially on our
own originations. Why do we have an appraisal watch list and broker
oversight group if we aren’t going to review the bad ones and take
action appropriately? . . . I just see so many of these cross my
desk, fraud, value, etc., it’s hard to just let them go by and not
do something.’” Credit Suisse’s Co-Head of Transaction Management
responded, “‘I think the idea is that we don’t want to spend a lot
of $ to generate a lot of QC results that give us no recourse
anyway but generate a lot of negative data, so no need to order QC
on each of these loans.’” The employee then stated, “‘I think the
lack of interest in bad loans is scary.’”

As another example, in June 2007, a Credit Suisse employee
identified 44 Wholesale loans Credit Suisse had itself originated
that had gone 60 days delinquent. Credit Suisse’s Co-Head of
Transaction Management wrote in response, “‘if we already know:
that the loans aren’t performing . . . the only thing QC will tell
us is that there were compliance errors, occupancy misreps etc. I
think we already know we have systemic problems in FC/UW
[fulfillment centers/underwriting] re both compliance and credit.
The downside of QC’ing these 44 loans is, after we get the QC
results, we will be obligated to repurchase a fair chunk of the
loans from deals, assuming the loans are securitized and the QC
results look like the QC we’ve done in the past. So based on a
wholesale QC historical fail rate of over 35 percent (major rep
defects), the avg bal of wholesale loans and the loss severities,
it is reasonable to expect this QC may cost us a few million
dollars.’” Credit Suisse has now acknowledged that it “did not
inform investors or ratings agencies that its Wholesale loan
channel had a ‘QC historical fail rate of over 35 percent (major
rep defects).’”

Credit Suisse commented about the mortgage loans that accumulated
in its inventory. For example, Credit Suisse’s Co-Head of
Transaction Management wrote to another Credit Suisse manager that
“loans with potential defects ‘pile up in inventory . . . . So my
theory is: we own the risk 1 way or another. . . . I am inclined to
securitize loans that are close calls or marginally non-compliant,
and take the risk that we’ll have to repurchase, if we can’t put
them back, rather than adding to sludge in inventory. . . .’ One of
the senior traders responded, ‘Agree.’” In another instance, a
Credit Suisse senior trader commented in 2007 that “‘we have almost
$2.5B of conduit garbage to still distribute.’” In another
instance, a Credit Suisse trader wrote to a top manager, discussing
another bank to which Credit Suisse was seeking to sell loans from
its inventory, and stated, “‘[The other bank] again came back with
an embarrassing number of diligence kicks this month. . . . If
their results are in any way representative of our compliance with
our reps and warrants, we have major problems.’ But rather than
holding these loans in its own inventory, Credit Suisse securitized
certain of these loans into its RMBS.”

Assistant U.S. Attorneys Kevin Traskos, Hetal J. Doshi, Shiwon Choe,
Ian J. Kellogg, Lila M. Bateman, and J. Chris Larson of the District of
Colorado investigated Credit Suisse’s conduct in connection with RMBS,
with the support of the Federal Housing Finance Agency’s Office of the
Inspector General (FHFA-OIG).

“Credit Suisse knowingly put investors at risk, and the losses caused
by its irresponsible behavior deeply affected not only financial
institutions such as the Federal Home Loan Banks, but also taxpayers,
and contributed significantly to the financial crisis,” said Special
Agent in Charge Catherine Huber of the Federal Housing Finance
Agency-Office of Inspector General’s (FHFA-OIG) Midwest Region. “This
settlement illustrates the tireless efforts put forth toward bringing a
resolution to this chapter of the financial crisis. FHFA-OIG will
continue to work with our law enforcement partners to hold those who
have engaged in misconduct accountable for their actions.”

The $2.48 billion civil monetary penalty resolves claims under FIRREA,
which authorizes the federal government to impose civil penalties
against financial institutions that violate various predicate offenses,
including wire and mail fraud. The settlement expressly preserves the
government’s ability to bring criminal charges against Credit Suisse or
any of its employees. The settlement does not release any individuals
from potential criminal or civil liability. As part of the settlement,
Credit Suisse has agreed to fully cooperate with any ongoing
investigations related to the conduct covered by the agreement.

Credit Suisse will pay out the remaining $2.8 billion in the form of
relief to aid consumers harmed by its unlawful conduct. Specifically,
Credit Suisse agrees to provide loan modifications, including loan
forgiveness and forbearance, to distressed and underwater homeowners
throughout the country. It also agrees to provide financing for
affordable rental and for-sale housing throughout the country. This
agreement represents the most substantial commitment in any RMBS
agreement to date to provide financing for affordable housing—a crucial
need following the turmoil of the financial crisis.

The settlement is part of the ongoing efforts of President Obama’s
Financial Fraud Enforcement Task Force’s RMBS Working Group, which has
recovered tens of billions of dollars on behalf of American consumers
and investors for claims against large financial institutions arising
from misconduct related to the financial crisis. The RMBS Working Group
brings together attorneys, investigators, analysts and staff from
multiple state and federal agencies, including the Department of
Justice, U.S. Attorneys’ Offices, the FBI, the U.S. Securities and
Exchange Commission (SEC), the Department of Housing and Urban
Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG,
SIGTARP, the Federal Reserve Board’s OIG, the Recovery Accountability
and Transparency Board, the Financial Crimes Enforcement Network and
multiple state Attorneys General offices around the country. The RMBS
Working Group is led by Director Joshua Wilkenfeld and four co-chairs:
Principal Deputy Assistant Attorney General Mizer, Assistant Attorney
General Leslie R. Caldwell of the Justice Department’s Criminal
Division, Director Andrew Ceresney of the SEC’s Division of
Enforcement, and New York Attorney General Eric Schneiderman. This
settlement is the latest in a series of major RMBS settlements
announced by the Working Group.